How to Become A Bankable Business
Helping Businesses
Grow & Succeed
Presented by Ray Juncosa, Florida SBDC at FIU
State Designated as Florida’s Principal Provider of Business Assistance [§ 288.001, Fla. Stat.]
Helping Businesses Grow & Succeed
WHERE DOES OUR STORY BEGIN?
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BEGIN BY UNDERSTANDING HOW LENDERS EVALUATE BORROWERS
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THE 5 C’S OF CREDIT
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1. CHARACTER. The first of the 5 C’s – and the most important
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YOUR CREDIT SCORE. What it means. Work on improving it.
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FICO. FAIR ISAAC COMPANYCREDIT SCORING
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THE CREDIT BUREAUS
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WHERE ARE YOU ON THE CREDIT SCORE SPECTRUM?
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BANKS ARE CREATING SCORES WITH MORE STRINGENT REQUIREMENTS
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TAKE ACTION TO REPAIR CREDIT
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WHAT CREDIT SCORE RANGES TO TARGET FOR?
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2. CAPACITYYour ability to repay a loan
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CAPACITY EVALUATION IS A PURELY QUANTATATIVE PROCESS
UNIVERSAL CASH
FLOW & LEVEL
OF
INDEBTEDNESS
COMPANY
PERSONAL
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WHAT ARE THE KEY AREAS THAT BANKS WANT TO EVALUATE ?
CREDIT
ANALYSIS
LIQUIDITY
INDEBTEDNESS
PROFITABILITY
EFFICIENCY
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LIQUIDITY: Ability to meet short-term obligations with short-term assets
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SOLVENCY: Level of indebtedness & financial management
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UNDERSTANDING THE DEBT SERVICE COVERAGE RATIO
ØBanks use the DSCR as a way to weed out undesirable loans due to high level of debt.– The ratio simply states that an acceptable
DSCR is 1.25– Or, for every dollar you spend, you should
produce $1.25
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UNDERSTANDING THE DEBT SERVICE COVERAGE RATIO
ØThis is where higher cash flows and profitability come in.
• 1.25 DSCR is the typical entry level at all banks. Anything lower will keep you out of the game.
• As the risk on the lending activity grows, so does the required (higher) DSCR.
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PROFITABILITY: Reflects company’s success in generating profits
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TYPICAL CHALLENGES WITH SMALL BUSINESSES
ØLack of knowledge regarding operating margins & profitability.
ØNot understanding how to do a breakeven analysis to adequately price products or services.
ØPoor management of working capital cycle is often the demise of small businesses
Helping Businesses Grow & Succeed
TYPICAL CHALLENGES WITH SMALL BUSINESSES
ØNot understanding the 3 key statements: Balance Sheet; Profit & Loss; and Cash Flow Statements.
• The above are the financial language of bankers and what they use to evaluate your company.
• Your statements will tell the story on the course of your business and its overall performance.
Helping Businesses Grow & Succeed
EFFICIENCY: How a company manages its cash conversion cycle. The shorter the cycle, the better.
Helping Businesses Grow & Succeed
A FEW QUICK POINTS ABOUT CARRYING RECEIVABLES
ØBanks often offer lines of credit secured by your receivables• These receivables are often short term in
nature and a current asset of the company that can be used as collateral
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A FEW QUICK POINTS ABOUT CARRYING RECEIVABLES
ØHowever, these receivables are often carved down by required limit on term, level of delinquency, and risk concentration of customers
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A FEW QUICK POINTS ABOUT CARRYING RECEIVABLES
ØSo, that very large customer who buys and pays on time and you value so much – if he or she make up more than 15-20% of your portfolio, they are not included.
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WITHOUT A QUANTITATIVE ANALYSIS OF ALL KEY AREAS OF A BUSINESS, BANKS CANNOT EXTEND LOANS
LEVEL OF
INDEBTEDNESS
GOOD CREDIT
SCORES
STRONG &
SUSTAINABLE CASH FLOWS
STRONG
PROFITABILITY
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3. COLLATERAL. A secondary source of repayment
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THE BENEFITS OF SECURED LENDING
SECURED
LENDING
RATES
TERMS
NEW
CO.
LOW
SCORE
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COLLATERAL DOESN’T MAKE A BAD LOAN GOOD …
ØIn today’s environment, bankers are more cash flow sensitive than asset sensitive.
ØCollateral can be difficult to manage in a default scenario
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… BUT A GOOD LOAN BETTER
ØThe financial crisis of 2008 was a testament to this fact.
ØManaging REOs are expensive and almost always sold at a discount.
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4) CONDITION. Evaluates the industry of borrower’s business & its external
factors
MATURITY
REGULATION
INDUSTRY
BARRIERS
OF ENTRY
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5) CAPITAL. This is your skin in the game; your equity in the business
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HOW DO YOU CALCULATE YOUR CAPITAL ?
Assets – Liabilities = Owners Equity
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HOW TO PREPARE TO MAKE YOUR COMPANY BANKABLE
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TO BECOME BANKABLE, UNDERSTAND WHAT BANKS LOOK FOR
KEEP YOUR CREDIT SCORE AT
A REASONABLE LEVEL 670+
REASONABLE LEVEL OF
INDEBTEDNESS (DEBT SERVICE COVERAGE OF 1.25
AND ABOVE)
EFFICIENTLY MANAGE
WORKING CAPITAL CYCLE; AVOID TOO MUCH
INVENTORY OR TOO MUCH
IN CREDIT SALES ( A/R)
UNDERSTAND YOUR
PERFORMANCE MARGINS & OVERALL FINANCIAL
PERFORMANCE
MAINTAIN AN ADEQUATE
LEVEL OF CAPITAL THROUGH RETAINED EARNINGS OR
CAPITAL INFUSIONS
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KEEP TAXES UP TO DATE & CURRENT YEAR FINANCIAL STATEMENTS ON
ACCOUNTING SOFTWARE
ØLender’s loan process require last two years tax returns and current financial statements
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ACCOUNTING SOFTWARE
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ALL LENDERS’ LOAN PROCESS REQUIRE LAST 2 YEARS TAX RETURN & CURRENT FINANCIAL STATEMENTS
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EMBRACE & UNDERSTAND FINANCIAL STATEMENTS TO BETTER UNDERSTAND
YOUR COMPANY’S PERFORMANCE
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THE BALANCE SHEET
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THE INCOME STATEMENTALSO CALLED P & L
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THE CASH FLOW STATEMENT
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THE BREAKEVEN ANALYSIS
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COMPONENTS YOU WILL NEED
FIXED
EXPENSES•OVERHEAD
VARIABLE
EXPENSES
•COST OF
GOODS
SOLD
CONTRIBUTION
MARGIN
• MONEY LEFT
OVER TO COVER
OVERHEAD
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VARIABLE EXPENSES AND COST OF GOODS SOLD
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FIXED EXPENSES
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USE YOUR CAPITAL STRUCTURE ADEQUATELY TO STRENGTHEN
FINANCIAL POSITION
CAPITAL
STRUCTURE
SWAP
EQUITY FOR DEBT
RESTRUCTURE
DEBT
SWAP SHORT
TERM FOR
LONGTERM
DEBT
REFINANCE
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CAPITAL STRUCTURE: Made of equity & debt / Your funding sources
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FINAL RECOMMENDATIONS
KEEP TRACK OF YOUR
CREDIT SCORE AND
SEEK CREDIT REPAIR
WHENEVER NEEDED
TAKE A COURSE IN
FINANCIAL
STATEMENTS AND
BREAKEVEN ANALYSIS
LEARN TO BETTER
MANAGE YOUR CASH
CONVERSION CYCLE
MANAGE YOUR DEBT
RESPONSIBLY
UNDERSTAND YOUR
PROFIT MARGINS TO
BETTER MANAGE YOUR
PROFITABILITY
Helping Businesses Grow & Succeed
Helping Businesses Grow & Succeed
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